Hedging Foreign Exchange Risk with Forwards, （与远期外汇风险对冲,）.pdf

Hedging Foreign Exchange Risk with Forwards, Futures, Options and the Gold Dinar: A Comparison Note Ahamed Kameel Mydin Meera Department of Business Administration International Islamic University Malaysia Introduction The 1997 East Asian currency crisis made apparent how vulnerable currencies can be. The speculative attacks on the Ringgit almost devastated the economy if not for the quick and bold counter actions taken by the Malaysian government, particularly in checking the offshore Ringgit transactions. It also became apparent the need for firms to manage foreign exchange risk. Many individuals, firms and businesses found themselves helpless in the wake of drastic exchange rate movements. Malaysia being among the most open countries in the world in terms of international trade reflects the degree of Malaysia’s exposure to foreign exchange risk1. Foreign exchange risk refers to the risk faced due to fluctuating exchange rates. For example, a Malaysian trader who exports palm oil to India for future payments in Rupees is faced with the risk of Rupees depreciating against the Ringgit when the payment is made. This is because if Rupee depreciates, a lesser amount of Ringgit will be received when the Rupees are exchanged for Ringgit. Therefore, what originally seemed a profitable venture could turn out to be a loss due to exchange rate fluctuations. Such risks are quite common in international trade and finance. A significant number of international investment, trade and finance dealings are shelved due to the unwillingness of parties concerned to bear foreign exchange risk. Hence it is imperative for businesses to manage this foreign exchange risk so that they may concentrate on what they are good at and eliminate or minimize a risk that is not their trade. Elsewhere traditi